Hedge Funds Are Shorting The Market Now More Than They Have All Year

After being squeezed on their shorts over the past four years as equities rallied, a potential crash this time could prove more profitable for hedge funds as "growth prospects are lower and valuations are higher."

The price-earnings ratio for the S&P 500 has risen to 16.3 from 14.1 since the beginning of the year.

The ISI index of hedge fund long versus short bets, fell nearly 8% last week, A decrease in the index indicates an increase in bearish sentiment among hedge fund managers. the ratio is at about the same level as it was in August 2011, the last time a US credit default seemed imminent, which was followed by a 20% slide in the S&P.

U.S. Steel Corp, the US' largest steel-maker has been the third-most shorted stock in the S&P 500. The company's stock has gone up 6.7 percent so far in October, compared to an S&P rally of 1.3 percent.

Two other companies with high short interest have been Safeway, the grocery store chain and Micron Technologies, the memory-chip maker, whose shares have both been up 24% since last month. Bloomberg's data indicated a short interest of 19% of available shares for Safeway and 10% for Micron Technologies.

From Bloomberg:

"It is hard to be too critical of being more bearish going into the government shutdown and debt ceiling battle with the market up over 20 percent," Howard Ward, the chief investment officer at the $40 billion Gamco Investors told Bloomberg. "We are not out of the woods yet, so those bets may yet prove worthy."

Brian Barish, president of the $8 billion Cambiar Investors, told Bloomberg, "There still are people out there who are convinced the whole market and financial system is some house of cards... I think they wind up shooting themselves and their investors in the foot with the permabear mentality, but it persists."